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Bolivia’s Gas Problems

Last Friday, after just 14 months in office, President Evo Morales named his fourth president of Bolivia’s state oil and gas company (YPFB) in just over 14 months in office, Guillermo Aruquipa Copa. Bolivia’s oil and gas team has been a story of one turnover after another, including three heads of its regulatory agency and two energy ministers. The current minister, Carlos Villegas, submitted his resignation last month, but was talked into staying by President Morales.

This and other recent setbacks have left Bolivians questioning their government’s capacity to manage its all-important oil and gas industry.

Contract Problems

Manuel Morales Olivera (no relation to President Morales), who was replaced as YPFB president after less than two months at his post, had faced a wave of criticism over his role in the negotiating of 44 new contracts with 12 foreign oil and gas companies. After months of tense negotiations, on October 28th of last year the Bolivian government declared an important milestone in their nationalization process when the contracts were signed. The new contracts, approved by Congress on November 28, aim to give Bolivia a measure of control over its oil and gas and create higher taxes that would more than triple government revenue from those of 2004. This critical new revenue would provide Bolivia with an important source of funds to begin to address its social and development needs. But almost five months after their signing, however, the contracts are not yet in force.

Morales Olivera’s credentials had been questioned from the start. He had no previous experience in the oil and gas business before President Morales named him an advisor to YPFB’s president in January of last year. He did, however, come with significant party references - his father is a leading member of the MAS party, and his sister the director of Bolivia’s customs service. Last October opposition lawmakers accused him of favoring his father in the awarding of auditing contracts for gas fields. Then in January, over objections by critics that he was unqualified, President Morales tapped Morales Olivera to be YPFB’s president despite a YPFB statute that stipulates that the company's president should be a professional in the field, and have at least five years’ leadership experience in the energy sector.

One of Morales Olivera’s first moves as YPFB president was to suspend the implementation of the October contracts, stating that the state company was unable to “guarantee the necessary conditions for their implementation," citing transcription errors that he said did not affect the content of the contracts. On February 12th the Morales administration proposed an amendment to Congress to correct errors in 15 of the 44 contracts. The amendment is being held up by the opposition-controlled Senate that says there are both errors of ‘form’ and ‘substance’ in the contracts, and the impasse can only be overcome by passage of further legislation. The Senate is currently holding public hearings to review the contracts, saying they will take all the time they need to review in detail all the contracts and their annexes.

Secret Side Deals and Havana NightsIssues of contention in the October contracts include errors such as incorrect company names and locations of gas and oil fields, and also more serious issues that would affect government revenues such as what company expenses are deductible. In grueling Senate testimony this past week, both Minister Villegas and ex-YPFB president Juan Carlos Ortiz said they were unaware that Morales Olivera, chosen by the Morales administration to head Bolivia’s negotiating team during the October contract talks, had made a verbal side agreement with Petrobras (Brazil’s state-private oil and gas company) in the final moments of negotiations.

The agreement Morales Olivera made was to “soften,” in the week after the contracts were signed, an annex that concerns what expenses by Petrobras are eligible for tax deductions. Morales Olivera, in his defense, said both Villegas and Ortiz were present when the decision was made to negotiate a different version of the annex. Earlier this month Morales Olivera blamed errors in new contracts on the company’s disadvantage in complex negotiations with foreign oil and gas companies: “on one side of the negotiating table sat professionals with 30 years of experience [in oil and gas], and on our side, people just 30 years old.”

Perhaps the final blow for Morales Olivera was the appearance in national media of a series of photographs taken last December showing him and his negotiating team of young professionals, who call themselves the ‘rug rats,’ enjoying the beaches and nightlife of Havana, Cuba. They had just completed a training seminar at a cost to Bolivian taxpayers of over $40,000. Vice President Garcia Linera has asked YPFB to justify these expenses.

What’s Next?

Upon taking office, the new president of YPFB, Guillermo Aruquipa Copa, former vice minister of oil and gas exploration, warned that any further delay in the application of the new contracts could have grave consequences for the country. He asked that the corrected contracts be approved this week. But getting the contracts through the Senate is no sure thing this time around.

On Thursday opposition party members and Evo Morales’ former first energy minister, Andres Soliz Rada, called for negotiations of contracts to start over, stating they were invalid. Roughly $4 billion in investments are pending, much of which will go to meet a quadrupling in gas export demand from Argentina, which are estimated to raise government oil and gas revenues to nearly $2.5 billion by 2010. It also delays the administration’s nationalization process, chiefly the buying back of a controlling interest in the five public-private capitalized companies involved in exploration, development, refining and distribution that used to make up YPFB - as mandated by the May 1 decree of last year.

A Democracy Center source within YPFB said that the refineries would likely revert to YPFB control, along with accompanying fuel distribution duties, this May. If recent history is any guide, however, that timeline may be overly optimistic. Critics say the government is asking YFPB to move faster than it can - that the operating funds and technical capacity are not in place yet to be able to operate efficiently in and oversee Bolivia’s oil and gas industry. Fuel shortages in the domestic market and a lack of spending on social needs and infrastructure, despite windfalls in oil and gas revenues, have also lead to continuing frustrations among the Bolivian people.

Minister Villegas claims the new contracts will net Bolivia $82 billion in revenue in the next 25 years. But implementing the government’s nationalization policy that would turn this potential into reality is no easy task. "We’ve got to turn a ministry that before only served to sign papers into a body that can design energy policy," explains Villegas. "We've got to turn a state company used to only rubber-stamped contracts into the main operator of a huge industry." To date, Bolivia’s lack of capacity has become the main impediment to real change.

In testimony before the Senate last week, former YPFB president Ortiz said the motive for his January resignation was the constant destabilization and sabotage carried out by government officials who started an “information war” against him after he called attention to the errors in the October contracts. Such in-fighting does not bode well for YPFB’s prospects of building a cohesive oil and gas management team that is fully capable of leading the development of Bolivia’s oil and gas resources.